Scott Refrigeration (Manitoba) Ltd. v. M.N.R.

Scott Refrigeration (Manitoba) Ltd. v. M.N.R. Court (s) Database Tax Court of Canada Judgments Date 2005-08-16 Neutral citation 2005 TCC 432 File numbers 2005-147(EI) Judges and Taxing Officers Terrence O'Connor Subjects Employment Insurance Act Decision Content Docket: 2005-147(EI) BETWEEN: SCOTT REFRIGERATION (MANITOBA) LTD., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. ____________________________________________________________________ Appeal heard on June 28, 2005 at Winnipeg, Manitoba Before: The Honourable Justice T. O'Connor Appearances: Counsel for the Appellant: Deryk Coward Counsel for the Respondent: Penny Piper ____________________________________________________________________ JUDGMENT The appeal of the decision of the Minister of National Revenue made under the Employment Insurance Act ("Act") is allowed, and the decision that Mark Adams (the "Worker") was engaged in insurable employment by Scott Refrigeration (Manitoba) Ltd. (the "Employer") during the period from January 1, 2000 to December 31, 2003 is vacated. Signed at Ottawa, Canada, this 16th day of August, 2005. "T. O'Connor" O'Connor, J. Citation: 2005TCC432 Date:20050816 Docket: 2005-147(EI) BETWEEN: SCOTT REFRIGERATION (MANITOBA) LTD., Appellant, and THE MINISTER OF NATIONAL REVENUE, Respondent. REASONS FOR JUDGMENT O'Connor, J. [1] This is an appeal by the Employer of a decision of the Minister of National Revenue that the Worker was engaged in insurable employment for purposes of the Act during the period from January 1, 2000 to December 31, 2003. That decision was to the effect that notwithstanding the fact that the Worker and the Employer were not at arm's length, they would have entered into a similar contract of employment had they been dealing at arm's length. The position of the Employer is that the decision was incorrect, that the Worker was not insurable and that consequently the employment insurance premiums should be refunded. [2] The decision of the Minister was based on paragraphs 5(2)(i) and 5(3)(b) of the Act. They read as follows so far as material: 5(2) Insurable employment does not include (a) ... (i) employment if the employer and employee are not dealing with each other at arm's length. 5(3) For the purposes of paragraph (2)(i). (a) the question of whether persons are not dealing with each other at arm's length shall be determined in accordance with the Income Tax Act; and (b) if the employer is, within the meaning of the Act, related to the employee, they are deemed to deal with each other at arm's length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length. [3] It is not disputed that the Worker and the Employer are related, the Worker being the son of Dwight Adams and Nancy Adams, who together owned 100% of the shares of the Employer. What is attacked in this appeal is the Minister's decision that he was satisfied, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it was reasonable to conclude that the Employer and the Worker would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length. The corollary of that decision is that notwithstanding the non-arm's length relationship the Worker was insurable and the premiums were properly paid. [4] There has been some considerable development in this area especially set forth in certain decisions of the Federal Court of Appeal. The earlier cases held that the Minister's opinion could not be interfered with on an appeal to this Court unless it could be shown that in the course of forming that opinion the Minister had committed what might be termed "an administrative law error". As the Act confers a discretion on the Minister, this Court had no mandate to simply substitute its opinion for that of the Minister. However, if in the course of the hearing of an appeal the Appellant were able to show that the Minister had erred in law in forming his opinion, then this Court's function was to proceed to a de novo determination and question whether the terms of the employment contract could reasonably be considered to be those that arm's length parties would have arrived at. In other words, after finding that the Minister's decision was vitiated by an administrative law error, only then, could this Court substitute its opinion for that of the Minister. [5] In Légaré v. Canada, [1999] F.C.J. No. 878 Marceau J.A., speaking for himself and Desjardins and Noel JJ. A., said at paragraph 4: 4 The Act requires the Minister to make a determination based on his own conviction drawn from a review of the file. The wording used introduces a form of subjective element, and while this has been called a discretionary power of the Minister, this characterization should not obscure the fact that the exercise of this power must clearly be completely and exclusively based on an objective appreciation of known or inferred facts. And the Minister's determination is subject to review. In fact, the Act confers the power of review on the Tax Court of Canada on the basis of what is discovered in an inquiry carried out in the presence of all interested parties. The Court is not mandated to make the same kind of determination as the Minister and thus cannot purely and simply substitute its assessment for that of the Minister: that falls under the Minister's so-called discretionary power. However, the Court must verify whether the facts inferred or relied on by the Minister are real and were correctly assessed having regard to the context in which they occurred, and after doing so, it must decide whether the conclusion with which the Minister was "satisfied" still seems reasonable. [6] It appears that Légaré, supra, has overruled the earlier cases. For example in Pérusse v. Canada, [2000] F.C.J. No. 310, Marceau J.A. wrote the following, concurred in by Décary J.A. 13 It is clear from reading the reasons for the decision that, for the presiding judge, the purpose of his hearing was to determine whether the Minister, in the well-known expression, had exercised "properly" the discretion conferred on him by the Act to "recognize the non-exception" of a contract between related persons. He therefore had to consider whether the decision was made in good faith, based on the relevant facts disclosed by a proper hearing, not under the influence of extraneous considerations. Accordingly, at the outset, at p. 2 of his reasons, the judge wrote: The determination at issue in the instant appeal results from the discretionary authority provided for by the provisions of s. 3(2)(c) of the Act, [now 5(3)(b)] which reads as follows: ... The appellant was required to discharge the burden of proof, on the balance of probabilities, that the respondent in assessing the matter had not observed the rules applicable to ministerial discretion, and if this could not be done this Court would not have no [sic] basis for intervening. And finally, his conclusion at p. 14: So far as the appeal is concerned, I cannot allow it as the appellant has not proven that the respondent exercised his discretion improperly. ... [7] In Birkland v. M.N.R. 2005 T.C.C. 291, Bowie J. summarized the current state of the law as follows: This Court's role, as I understand it now, following these decisions, is to conduct a trial at which both parties may adduce evidence as to the terms upon which the Appellant was employed, evidence as to the terms upon which persons at arm's length doing similar work were employed by the same employer, and evidence relevant to the conditions of employment prevailing in the industry for the same kind of work at the same time and place. ... In the light of all that evidence, and the judge's view of the credibility of the witnesses, this Court must then assess whether the Minister, if he had had the benefit of all that evidence, could reasonably have failed to conclude that the employer and a person acting at arm's length would have entered into a substantially similar contract of employment. That, as I understand it, is the degree of judicial deference that Parliament's use of the expression "... if the Minister of National Revenue is satisfied ..." in paragraph 5(3)(b) accords to the Minister's opinion. Facts [8] The principal assumptions of fact contained in the Reply to the Notice of Appeal are as follows: ... (a) the Appellant is in the business of installing and servicing refrigeration, air conditioning and heating equipment; ... (e) the Worker and the Appellant are related to each other within the meaning of the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended (the "Act"); ... (h) the Worker has been employed by the Appellant for eight years; (i) the Worker typically worked for the Appellant from May to August each year; ... (l) the Worker's duties included installing and servicing refrigeration, air conditioning and heating equipment; (m) during the period in question, the Appellant did not employ any other workers performing similar duties to those of the Worker; (n) the Worker has never performed any work for the Appellant for which he was not paid; (o) the Worker did not provide timesheets to the Appellant as they were not required by the Appellant; (p) instead of timesheets, the Worker's hours were recorded on customer work orders; (q) the Worker's usual days and hours of work were Monday to Friday, 8 hours per day; (r) the Worker's hours of work were determined by the Appellant; (s) during the period in question, the Worker was paid at an hourly rate of $21.88 in 2000, $25.00 in 2001 and 2002 and $27.00 in 2003. (t) the Worker's rate of pay was determined by the Appellant and was based upon the guidelines of local union # 254, as well as the Worker's ability; (u) the Worker was not paid any bonuses; (v) the Worker was always paid for the hours he worked; (w) if the Worker worked overtime, he was paid overtime according to the union rates; (x) the Worker received 6% vacation pay; (y) the Worker was always paid on time; (z) the Worker never deposited his pay cheques back into the business bank account of the Appellant; (aa) the Worker could not hire and pay his own helpers or replacements; (bb) any expenses incurred by the Worker in the performance of his duties were reimbursed by the Appellant; (cc) the Worker supplied his own small hand tools in accordance with industry union standards, while the Appellant provided the balance of the tools and equipment required by the Worker; (dd) as a journeyman, the Worker was expected to work without supervision; (ee) the Worker was able to determine the type of work to be done for customers, provide estimates and then complete the work; ... (ii) the Worker was required to ask the Appellant if he wanted to take time off; (jj) the Worker could not come and go as he pleased; (kk) the Worker did have some latitude with respect to his working hours, such as starting earlier so that he could leave earlier, providing there was no conflict with the customers of the Appellant; (ll) the Worker did not receive any benefits from the Appellant; (mm) the Worker could have been fired by the Appellant; (nn) the Worker did not have signing authority on the bank accounts of the Appellant; (oo) the Worker had no investment in the business of the Appellant, nor did he personally guarantee any loans for the Appellant; (pp) the Minister considered all of the relevant facts that were made available to him, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed; and (qq) the Minister was satisfied that it was reasonable to conclude that the Worker and the Appellant would have entered into a substantially similar contract of employment if they had been dealing with each other at arm's length. The Worker, in his testimony contradicted paragraphs (n), (v) and (w) and clarified paragraph (dd) by stating that in the industry the Department of Labour expected supervision. [9] It is the position of counsel for the Employer that the Employer and the Worker are not at arm's length, are therefore consequently excluded from the application of the Act and that the employment insurance premiums paid are to be refunded. It is the position of counsel for the Respondent, based mainly on the Questionnaire which was completed by the Worker and which has been filed as Exhibit R-1, that notwithstanding that the Employer and the Worker are not at arm's length, the Employer would have entered into a similar contract of employment with an arm's length party. [10] The principal facts emerging from the testimony of the Worker (being the only witness called) are as follows: The Worker was paid on the basis of a 40 hour week and received no overtime pay notwithstanding that he worked an additional 12 to 20 hours per week and on one occasion in the summer of 2003 he worked an additional 100 hours over a 10 day period. The Worker explained further that as a rule in the industry journeymen workers are paid overtime at time and a half and sometimes more, that they provide time sheets whereas he did not, that he received no benefits such as medical and dental but did receive vacation pay. He was also frequently "on call" without pay, which is not usual in the industry. [11] The explanation of why the Worker did not demand overtime pay is contained in the following extract from the Worker's evidence: Q That's my question. Why weren't you getting paid for the hours you were working? A It's my dad and I thought I'd be helping him out with the family business. And eventually one day I would be buying that company and I saw a trade-off that, you know - that's just how we looked at it. Q Now if you were working for any other company not owned by your father, big or small - A Right. Q -- would you have worked for free 12 to 20 hours a week? A Never. Q Are you sure of that? A Positive. [12] The Worker stated further that he used the Employer's credit card and blank cheques to purchase needed parts. [13] Counsel for the Respondent took the Worker through the Questionnaire and highlighted certain areas where the answers in the Questionnaire were contradicted by the Worker's evidence in Court in particular with respect to hours worked and not being paid for overtime. The Worker stated that his evidence in Court was the truth and that some of the answers in the Questionnaire were given so as not to get his father in trouble with the Department of Labour. [14] After reviewing the evidence, considering the assumptions of the Minister, considering the Questionnaire and the explanations given by the Worker with respect thereto, I conclude that the decision of the Minister was incorrect for the following principal reasons: 1. I accept the credibility of the Worker as well as his explanations of why his answers in the Questionnaire varied from his sworn evidence in Court. 2. I agree with the Employer's Counsel's submissions that an arm's length worker would not have worked the many overtime hours the Worker worked without being paid. 3. I submit further that the facts of no benefits, no on call pay, using the Employer's credit card and blank cheques are not indicative of an employment contract with an arm's length worker. [15] For the above reasons, I conclude that the terms and conditions of employment of the Worker were not substantially similar to what they would be if the Worker had been dealing at arm's length with the Employer. [16] Consequently, the appeal is allowed and the decision of the Minister that the Worker, Mark Adams was engaged in insurable employment by the Employer Scott Refrigeration (Manitoba) Ltd. during the period from January 1, 2000 to December 31, 2003 is vacated. [17] At the hearing of this appeal, I made a preliminary decision that the appeal should be dismissed. That was an error and that preliminary decision is replaced by the above judgment allowing this appeal. Signed at Ottawa, Canada, this 16th day of August, 2005. "T. O'Connor" O'Connor, J. CITATION: 2005TCC432 COURT FILE NO.: 2005-147(EI) STYLE OF CAUSE: Scott Refrigeration (Manitoba) Ltd. and M.N.R. PLACE OF HEARING: Winnipeg, Manitoba DATE OF HEARING: June 28, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice T. O'Connor DATE OF JUDGMENT: August 16, 2005 APPEARANCES: Counsel for the Appellant: Deryk Coward Counsel for the Respondent: Penny Piper COUNSEL OF RECORD: For the Appellant: Name: Deryk Coward Firm: D'Arcy & Deacon LLP Winnipeg, Manitoba For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada